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No, Studios Won’t Buy Theaters, but Small Exhibitors Fear Destruction While DOJ Touts Innovation

Life after the Paramount Consent Decrees could bring significant change — or, it could be business as usual. Either way, it's now for distributors and theaters to figure out.

AMC Theater

AMC Theater

AMC

The Department of Justice announced November 18 that it’s begun the process to end the Paramount Consent Decrees, the 1948 agreement that blocked monopolistic studio practices, including owning theaters. In some regards, it’s a move that could amount to a shrug; all studios want the option of shorter theatrical windows, but enough to spend hundreds of millions buying, and operating, an aging business model? No.

However, the reasons that this matters to the film industry — and to the DOJ — aren’t based on what will happen: It’s all about what’s now possible.

“The idea,” said Timothy H. Gray, an attorney who works in antitrust law at Patterson Belknap Webb & Tyler, “is to unfetter the industry and see what develops.” He said the DOJ has determined that “the consent decree itself is operating as a restraint on innovation.”

In August 2018, the DOJ opened review of the decrees and allowed 60 days for public comment. In total, 77 organizations posted their comments, including the National Organization of Theater Owners and the Writers Guild of America West.

However, the overwhelming majority of those comments came from much smaller concerns, including many drive-in theaters and family-owned chains like Connecticut’s Bow Tie Cinemas. Some were convinced that studios would immediately move to open their own theater chains; others discussed their anxiety over block-booking practices, or losing what the Independent Cinema Alliance called the decrees’ “civilizing influence.”

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In the public comments, a Bow Tie representative expressed concerns echoed by many of its professional peers: Without the outright ban on block booking, small chains could lose the ability to curate their own programming.

“Chains of Bow Tie’s size (and smaller) would be disproportionately affected by the removal of block booking prohibitions, as we do not have as many screens to potentially spread out the major studio films we would be required to book in order to have access to the films our customers desire. … The prohibition on block booking is necessary to uphold other aspects of the Decrees and to prevent theatre chains such as Bow Tie from becoming de facto exclusive exhibitors of a particular studio’s content.“

While the DOJ’s decision heaps significant uncertainties on an industry in which there is no shortage, the agency isn’t picking on Hollywood. This move comes out of an initiative announced in April 2018, in which the antitrust division said it would end some 1,300 “legacy” decrees that, according to DOJ antitrust head Makan Delrahim, only served to “clog court dockets, create unnecessary uncertainty for businesses or, in some cases, may actually elicit anticompetitive market conditions.”

The overarching concern, Delrahim said in his November 18 speech to the American Bar Association, is serving consumer interests.

“We have determined that the decrees, as they are, no longer serve the public interest, because the horizontal conspiracy — the original violation animating the decrees — has been stopped,” he said. “The Division finds the consent decrees no longer meet consumer interests … We cannot pretend that the business of film distribution and exhibition remains the same as it was 80 years ago.”

No arguing that; among the studios covered in the decrees were the long-dead RKO and Republic studios. And Disney never fell under the decrees’ jurisdiction: In 1948, it wasn’t considered a major studio.

Delrahim is at least partially correct in saying that the initial inspiration for the decrees is moot: If studios wanted to buy theaters, they could have done so — and, sometimes they did. Sumner Redstone owned National Amusement theaters and Paramount. Universal/MCA once owned Cineplex. (Disney does own the El Capitan showcase in Hollywood.)

However, the other element that’s changed is the DOJ itself. Gray said it now favors giving businesses a lot of leeway when it comes to licensing intellectual property and maximizing profits. Under the decrees, certain vertical relationships were illegal per se; in the 2000s, the Supreme Court found that vertical restraints, in some cases, helped innovation and consumers.

“Abolishing the decrees is just updating the law that applies to the movie industry to reflect that courts will look at vertical relationships — if not more favorably, then at least with an eye to how it might help, not just how it might hurt, competition,” said Gray.

At this point, it’s impossible to assess the potential impact. Maybe it won’t change anything. Or maybe, once the decrees are removed, and there’s no longer specific legal impediment against who owns theaters, or block booking, or circuit dealing, it will inspire changes and innovations that meet “consumer interests.” Maybe that means small theaters will find it impossible to get big movies, and small distributors will lose access to big chains. Maybe studios will try to push their weight and force chains to accept movies with a 60-day theatrical window. Maybe studios will be so aggressive and greedy that it inspires a flurry of lawsuits.

“Consistent with modern antitrust law, the Division will review the vertical practices initially prohibited by the Paramount decrees using the rule of reason,” Delrahim said at the ABA. “If credible evidence shows a practice harms consumer welfare, antitrust enforcers remain ready to act.”

However, that also could mean exhibitors that want to report unfair competition must carry an additional burden of proof.

The first potential battleground will come during the “sunset period” for restrictions on block booking and circuit dealing. That gives studios and exhibitors two years decide how they want to handle their master license agreements going forward, and potentially create new ones.

Kino Lorber principal Richard Lorber said he’s not overly concerned about ending the decrees. “We live in a different universe than distributors who deal with chains,” said Lorber, whose distribution company most recently released the subtitled “Synonyms.” “Our independent arthouse venues are a resilient and feisty bunch who also impose their own territorial and other rules. Because they’re so close to their customers who are often subscribers or members of the theaters film societies, they won’t be bullied and don’t need to block book crappy films to get presumed blockbusters which they typically don’t want in any case.”

And, Lorber inadvertently echoes Delrahim’s belief that fewer regulations can inspire innovation.

”I think the salutary effect of this will nudge indie arthouses closer to year-round festival programming models and encourage them more cogently to build their membership base,” he said. “Being closer to their customers arms them against economic bullying.”

Of course, distributors and exhibitors are still governed by the same laws that regulate any business, but beyond that they’re free to create their own guidelines whether they like it or not. What those might look like, or if they will even change, no one can know — but, for the first time in 80 years, oversight for that decision now belongs solely to them.

Eric Kohn contributed to this report. 

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